Russian steel maker sets sight on U.S. Southern auto plants

Russian steel giant OAO Severstal Group is moving deeper into the North American automotive steel market to primarily go after Southern auto plants.

Severstal is building an $880 million Mississippi steel mill called SeverCorr LLC. The venture brings together a wide range of financiers and incentives. They include Russian investors, funding from a German export bank, loans and state incentives from Mississippi, private investors, low-cost Tennessee Valley Authority power rates and nonunion labor to supply the expanding auto market around the Southeast.

The mill, in Columbus, Miss., will be equipped to turn out 72-inch-wide steel sheets, which will allow the company to supply larger vehicles. Many North American mills are limited to 64-inch widths.

Over the past two years, Severstal, of Moscow, has taken steps to capitalize on North America's straining supply of finished steel for vehicles.

Bought Rouge plant

In December 2003, Severstal purchased the Rouge Industries Inc. steel plant in Dearborn, Mich., outbidding U.S. Steel Corp. for the publicly owned 80-year-old plant. The Rouge plant originally was Henry Ford's source of steel for Ford vehicles.

Severstal, the world's sixth largest steel producer, said last summer that it would spend another $180 million to upgrade the Rouge plant. At that time, it said it also would spend $120 million to increase coke production at a West Virginia plant to support steel production here.

The Mississippi venture, which held a groundbreaking last month, is initially targeting about 30 percent of its capacity at the auto industry, says SeverCorr CEO John Correnti.

Correnti, the former CEO of steel producer Nucor Corp., forecasts that about 250,000 tons of the mill's 1.5-million-ton annual capacity will go to exposed steel applications on vehicles.

He said that about the same amount will go to nonexposed vehicle applications when the mill comes on line in late 2007.

For the past two years, North American automakers have been socked by rising steel prices as world demand outstripped global capacity. U.S. steel consumers, including the auto industry, are now relying on imports for more than a quarter of their needs.

Correnti said Severstal is providing about $200 million of the cost and KfW IPEX Bank, a bank affiliated with the German government, is providing about $230 million in financing. In a phone interview from the Mississippi plant site, he told Automotive News that he and a group of private investors also are putting up some of the venture's cost.

New U.S. steel source

Who: SeverCorr LLC

Where: Columbus, Miss.

What: $880 million steel mini-mill, with capacity for 1.5 million tons a year by late 2007

But Andrew Kotas, an international steel consultant and CEO of steelonthenet.com, said steel makers are facing a tough time making profits from the auto industry.

"Nobody in automotive makes money," Kotas said in a phone interview from his London office. "The margins are low, and the costs are very high. I'd put a significant question mark over the financial considerations of this venture."

Correnti said the critical issue for SeverCorr will be high productivity. The mill will employ just 450 workers, with wages of about $70,000 a year. At least half of the wages will be in productivity incentives, paid out weekly, he said.

"The more steel we turn out, the bigger the paychecks," Correnti said. "Our bankers told me we didn't need to pay those kind of wages in the rural area we're in. I told them I'm going to try to pay even more because that will mean we're making more steel, and the more steel we make, the more profitable we are.

"I want a nonunion plant with one job description -- take scrap metal and make steel out of it."